British economy at risk of renewed recession

Clouds are reflected in buildings at the financial district of Canary Wharf in London in this file photo taken January 23, 2009.

Reuters/Kevin Coombs

LONDON (Reuters) - Britain will find out later on Friday whether its economy shrank again late last year, raising the risk that it is heading for its third recession since the 2008 financial crisis.

Forecasts from economists polled by Reuters centre on a 0.1 percent fall in gross domestic product (GDP) between October and December compared with the previous quarter, when Britain briefly returned to growth.

A further contraction in early 2013 would mean renewed recession, heaping more pressure on the Conservative-led government to soften budget cuts and tax rises that many economists and voters blame for deterring spending and investment.

"Fragile but stable is the best way to describe the UK economy at the moment," said Rob Wood, economist at Berenberg Bank. "The UK is bouncing around a flat-lining trend, hence it does not take much for it to record modest contraction."

Three high-street retail chains have hit the rocks within the first few weeks of the new year, as a toxic mix of austerity, troubles in the euro zone and erosion of real earnings has weighed on the economy.

Central bank governor Mervyn King expects no more than a "gentle recovery" this year, while the International Monetary Fund this week cut its 2013 forecast for British growth and called on the government to slow the pace of budget cuts.

Industrial output between September and November, the latest period covered by official data, posted its biggest fall compared to the previous three months since April 2009.

However, output in the much smaller construction sector rose strongly in October and dropped only a little in November, while the far bigger services sector grew 0.1 percent on the month in October after a 0.6 percent decline in September.

"Production data is likely to be weak, particularly manufacturing. Services is a bit of an unknown and construction should be okay," said Amit Kara, an economist at bank UBS, who is pencilling in a 0.2 percent drop in fourth-quarter GDP.

The fourth quarter will inevitably look weak by comparison with the third, when the economy was boosted by the London Olympics. Similar one-off factors, such as this month's snow and freezing temperatures, could easily shrink the economy in the first three months of this year too, confirming recession.

That could leave the ruling Conservatives and Lib Dems fearing a hammering in elections in 2015.

One potential voter, 37-year-old Mahmoud Usmani who runs a stall selling leather bags at a market in London, said his standard of living had dropped in the past year.

"It's a situation which I don't feel that we are going to come out of quickly unless we actually start investing in real things, rather than the banks," he said.